2012. “Marketworthiness and Municipal Finance Reforms in India,” forthcoming, Isher Ahluwalia, P. Mohanty, and Ravi Kanbur, eds. Urban Infrastructure. Oxford University Press. Market Worthiness: An Institutional Reform Agenda for Urban Local Bodies in India1 Jessica Seddon Wallack2 v. March 18, 2012 1 I would like to thank Revati Dhoble for excellent research assistance and substantial contributions to an earlier draft of this paper, and Sujatha Srinivasan as well as the members of the HPEC on Urban Infrastructure for their comments on earlier drafts. 2 Jessica Seddon is Head of Research, Indian Institute for Human Settlements. This paper was written while she was Director, Centre for Development Finance, IFMR 1 2012. “Marketworthiness and Municipal Finance Reforms in India,” forthcoming, Isher Ahluwalia, P. Mohanty, and Ravi Kanbur, eds. Urban Infrastructure. Oxford University Press. Urban Marketworthiness Discussions of urban finance in India frequently come back to the question of why India’s municipal finance markets remain so thin. Cities are in need of long-term infrastructure finance and people are in need of infrastructure services. The prices being paid for real estate in central locations, private infrastructure solutions, and other substitutes for functional urban infrastructure clearly indicate willingness and ability to pay in some form. Urban areas are getting richer, and citizen complaints about their surroundings and service standard are become more vociferous – both forces that should accelerate both political and private sector interest in working out ways to finance and implement projects to meet urban citizens’ needs. While some authors have emphasized the need for supply-side incentives for private finance to cities, and others note the effect of concessional public sector finance on reducing cities’ incentives to seek private finance, the discussion nearly always comes back to some discussion of cities’ institutional weaknesses in managing finances and projects. In other words, even if cities had both incentives and supply-side reforms motivated the private sector to seek municipal investments, urban local bodies (ULBs) lack the capacity to access and use private funding sustainably. This paper attempts to provide an analytically coherent list of key institutional changes and city performance targets to measure progress toward building urban capacity to effectively, efficiently, access private financial markets and convert these funds into highquality infrastructure and services. It introduces the concept of “Marketworthiness,” defined as ULBs’ institutional readiness to access and use private finance for public ends. Creditworthiness, or the ULB’s ability to reliably repay its debts, is at the core of marketworthiness, but the performance metric adds several dimensions that are important for urban policy and more general market resilience. First, it emphasises particular ways of achieving financial creditworthiness, particularly from revenues that are elastic to urban growth and service quality delivered to citizens. Second, it emphasizes the ULB’s ability to convert finance into high quality infrastructure and services, rather than just financially viable projects. Third, emphasizes that cities should have systems for quickly and easily providing investors with adequate information to assess risk on an ongoing basis – ULBs should not only be “creditworthy,” but also obviously creditworthy to the average 2 2012. “Marketworthiness and Municipal Finance Reforms in India,” forthcoming, Isher Ahluwalia, P. Mohanty, and Ravi Kanbur, eds. Urban Infrastructure. Oxford University Press. shareholder. Finally, it comprises a specific and detailed list of criteria for benchmarking performance, unlike the broad assessments contained in city ratings using proprietary methodology.3 Marketworthiness is an important concept for several reasons. It creates a benchmark for sustained and sustainable financial soundness of municipal governments rather than emphasizing a temporary condition, creditworthiness, that can be obtained through financial structuring of particular deals or extraordinary institutional arrangements. Many municipal bonds in India have improved their credit ratings on the basis of escrowing specific revenue streams, guaranteeing intercepts of funds devolved from State Finance Commissions, or other relatively costly financial structuring. These practices limit cities’ flexibility in managing revenues for other purposes and increase the cost of market finance. Rewarding instruments’ creditworthiness without acknowledging the way it was achieved creates stronger incentives for cities to continue with these practices rather than “graduate” to be able to raise finance on more attractive terms – at least until budget constraints start to bind and private finance ceases to be an achievement in and of itself. In short, market worthiness can be thought of as the probability that a city’s financial instruments will be found creditworthy. Cities that are well run will often be found creditworthy. Cities that do not meet these conditions may be able to issue creditworthy debt with particular structuring or under particular institutional arrangements, but are less likely to gain a good rating time after time, issue after issue. Marketworthiness’ integration of governance, financial, and infrastructure delivery ability also provides a more fool-proof performance target for India’s cities than financial creditworthiness. Financial ratios are easier to fudge than institutional characteristics, and the more measured "performance" is used to determine some kind of reward, the more the 3 The city-level ratings reports carried out under JNNURM, for example, do not provide clear guidance on what institutions are viewed as more conducive to financial stability and predictability, however. Their discussion of non-financial information is highly subjective and it is difficult to determine the basis for the rater’s conclusion of “adequate institutions,” or “sufficient manpower,” or other judgments related to a city’s ability to manage its finances and projects. Ratings methodologies in general are trade secrets – while they are discussed in overview notes, it is hard to determine the specific reward or change in the market view for any given city action or institutional change. 3 2012. “Marketworthiness and Municipal Finance Reforms in India,” forthcoming, Isher Ahluwalia, P. Mohanty, and Ravi Kanbur, eds. Urban Infrastructure. Oxford University Press. incentive to manipulate accounts or take short-sighted actions to improve that particular measurement.4 Marketworthiness’s emphasis on basic financial disclosure also encourages a healthier market information ecosystem. The current opaque environment effectively means that credit ratings agencies provide the main market oversight, a situation that tends to be riskier than broader-based evaluation. A constant flow of information, beyond periodic ratings assessments, is also essential for secondary markets since investors need to track the changes in the value of the asset that they hold. Financial structuring and policy commitments can be a way of removing fluctuations in value and eliminating the need for constant monitoring and re-assessment, but this creates costly inflexibilities for municipal management. While the agenda laid out here overlaps with the reforms listed in the Jawarharlal Nehru National Urban Renewal Mission (JNNURM) conditionalities, the Thirteenth Finance Commission’s recommendations, and the priorities laid out in the Ahluwalia Committee Report on Indian Urban Infrastructure and Services, it focuses attention on a few priorities among the longer list. Section 2 elaborates on the components of marketworthiness, disussing the steps that cities and states must take to improve their ability to access private finance on reasonable terms in more detail. It lists both the rationale for the list of key reforms as well as specific indicators of progress toward marketworthiness. Section 3 discusses possibilities for implementing the marketworthiness agenda. The first part reviews the current urban institutional reform agendas embedded in the Jawaharlal Nehru National Urban Renewal Mission (JNNURM), the Thirteenth Finance Commission, and the High Powered Expert Committee on Urban Infrastructure, while the second discusses ways in which action on the priorities for marketworthiness could be accelerated. Most of the changes required would have to be state-level decisions and the political environment for these reforms is challenging. Section 4 concludes. 2. Components of Marketworthiness 4 These behaviours have been seen across the world - in national accounts in European countries seeking to sneak under the deficit limits for the Maastricht treaty, for example, in corporations attempting to boost their quarterly earnings reports for shareholders, and other cases. There is no reason to expect ULBs to be different. 4 2012. “Marketworthiness and Municipal Finance Reforms in India,” forthcoming, Isher Ahluwalia, P. Mohanty, and Ravi Kanbur, eds. Urban Infrastructure. Oxford University Press. Marketworthiness (MW) includes three broad dimensions of urban performance: predictable, sustainable revenues that are elastic to city economic and social development; consistent ability to convert investment into high-return projects; and information management for “ready reckoning” and reporting. The MW reform targets define institutions and processes that affect cities’ ability to repay investments rather than their willingness.5 It is a multi-dimensional comparison of cities rather than a single summary index. The approach that does not produce a simple, satisfying ordering of cities from most to least marketworthy, but it does enable benchmarking of strengths and weakness in particular policy areas that city and state officials can control. The Revenue Dynamics section includes both state and local institutions that affect the link between revenues and economic development or project performance as well as cities’ ability to raise and manage revenues. The Expenditure and Implementation section focus on steps to improve city planning and management performance. Effective implementation minimizes project risk, enabling cities to leverage market finance for their priorities rather than being limited to accessing it for a subset of projects that can obtain external guarantees. The Informational Infrastructure section includes institutions and practices that support cities’ ability to provide timely, detailed, accurate information to investors at low cost. Market oversight, the mechanism assumed to lead to ongoing reforms and improved city management can only be effective if participants have easy access to these details. The MW framework seeks to define specific institutions and practices that cities and states can implement to achieve broad goals such as being credit-worthy or financially stable. There are some cases, however, where reforms required to achieve a particular goal are necessarily city-specific and in these cases I propose an intermediate goal for cities to achieve to become more marketworthy. Increasing coverage of property taxes, for example, is one such challenge – the particular things cities need to do to ensure that a higher fraction of eligible properties are actually taxed will vary from city to city. Rather than 5 The risk of unwillingness to pay is more applicable in the case of sovereign lending, in which there are no higher political authorities to intervene in case of default, there are multiple lenders competing for business, and there are diplomatic or other non-commercial reasons for lenders to resume credit to earlier defaulters. The broader literature on sovereign and public sector debt emphasizes that credit risk depends on both, but it is hard to foresee a situation in India in which an urban local body would be supported or encouraged to default with impunity. 5 2012. “Marketworthiness and Municipal Finance Reforms in India,” forthcoming, Isher Ahluwalia, P. Mohanty, and Ravi Kanbur, eds. Urban Infrastructure. Oxford University Press. specify an institutional feature, progress on a specific outcome – higher coverage ratio – is the reform goal that in turn contributes to broad financial stability. The list tries to strike a balance between recommending specific steps that are precise but may be counterproductive in particular city contexts, and broad goals that will make sense for every city but for which the steps to attain the goals might vary across cities. Indicators were chosen on the basis of normative considerations about the kinds of institutions and practices that are likely to produce financially sound, predictable city management, the revealed preferences of market participants, and the viability of the indicator as a observable, monitorable performance metric. The public finance literature, for example, provides insights into the kinds of revenue powers and federal arrangements that are likely to give a city predictable, reasonably stable6 revenues that are a function of the quality of city management and underlying economic activity.7 The institutional economics literature gives a basis for identifying the features that are likely to support a city having consistently good project performance. Finally, I try to choose indicators that are under a ULB or state’s direct control. These more valuable as a benchmark for reform incentive programs than outcomes that fluctuate based on chance, larger economic and political trends, and other factors since there is a clear link between city effort and reward. Systems that reward outcomes that are produced by both effort and luck can actually discourage effort – when cities see that their costly efforts might not get rewarded if they have bad luck, they may not expend the effort in the first place. Appendix 1 summarizes the marketworthiness reform targets discussed below. 2.1 Revenue Dynamics Revenue Dynamics covers three main focus areas: revenue levels and expected growth, liquidity, and administrative efficacy of collection. 2.1.1. Revenue Levels and Growth 6 Although, technically, stable doesn’t matter as much as predictable. If things are predictably unstable, this can be managed through financial structuring. 7 Linkage of revenues to economic activity makes these somewhat more predictable, and leverages an entire industry devoted to predicting economic activity. 6 ARV: Property tax is based on the ARV, either the rent actually received or 2012. and Municipal Finance Reforms in India,” forthcoming, Isher Ahluwalia, P. the “Marketworthiness annual rent a property may fetch Mohanty, and Ravi Kanbur, eds. Urban Infrastructure. Oxford University Press. from year to year if let out to a hypothetical tenant. CVS: Property tax based on value of land and building taking future (possibly more intense) use into account. Value of land typically based on location according to rates set by state government; building value also based on characteristics of building according to schedules set by state. The institutions and practices discussed in this section affect whether a city’s tax regime provides predictable revenues that grow along with the city’s development. The indicators in the “collection ability section” UAM: Property tax is levied based on the area of the property and the neighborhood it is in. Some building characteristics may also be taken into account. measure cities’ ability to effectively value properties and collect revenues due to them. Property Tax System: Capital Value, Unit Area Method, or Hybrid > Annual Rental Value There is substantial room for property taxe revenues in India to become more buoyant. Mathur et al (2009)’s study of the 35 largest cities in India found an average annual growth rate of 7.9% in property tax revenues, over a time period in which the economy was growing at 8-9% and urban land values in particular were increasing at least twice as fast in many cities. “There is no evidence of this tax being a buoyant one,” the study concludes.8 Most governments in India use the ARV or UA method for property tax calculation. A third method, Capital Value, has been implemented in 57 Nirmala Nagara cities in Karnataka among others. Both unit area and capital value methods (and the hybrids that are emerging) are more marketworthy than the ARV because they are better able to respond to improvements in the property and surrounding infrastructure and thus grow with the city and the neighborhood’s development. They are also more transparent to administer, as the tax is based on concrete observable aspects of the property and neighborhood rather than a hypothetical tenant. Actual rental agreements could, in theory, provide a basis for administered tax based on ARV, but it is difficult to track these prices as there is no central repository for either market information or actual contracts. The ARV method’s ability to raise revenues is also affected by existing Rent Control Acts as well as any legal precedents set for the “fair rent” as required by Rent Control Mathur, O.P., Thakur, Debdulal, and Nilesh Rajadhyaksha (2009). “Urban Property Tax Potential in India,” NIPFP Working Paper. July, 2009. 8 7 2012. “Marketworthiness and Municipal Finance Reforms in India,” forthcoming, Isher Ahluwalia, P. Mohanty, and Ravi Kanbur, eds. Urban Infrastructure. Oxford University Press. provisions. These rents are typically well below market value and do not adjust with changes in the market. ARV is also vulnerable to ad hoc policy adjustments that affect its predictability. Some states have attempted to increase the revenue taken in under ARV by declaring commercial property to have higher value, considering seating capacity in case of public entertainment venues and other means. These measures can be adjusted or repealed as arbitrarily as they were imposed. State and local governments can still affect property tax revenues under the other systems by adjusting the valuations for particular areas of the city or building type or declaring new criteria, but there is a clear logical benchmark for these changes to follow.9 Other Revenues: Diverse Base > Specific Levies, More Revenue > Less Cities often have other revenue options that can be exploited including stamp duty, cesses on various economic activities, service charges, user charges, income from municipal properties, etc. “Marketworthiness” includes both having taxes that draw on a broader and more diverse base of economic activity and using these options well. The range of options is a matter of state policy, while the revenue collected from the available taxes depends on collection efficiency and the underlying tax base. Cities’ revenue potential can be summarized in two ways: actual per capita non-property tax revenues and a comparative list of ULB revenue powers. The first is an outcome measure of performance on non property-based taxes, the second provides a comparative assessment of the city’s potential revenue capacity and will hopefully highlight interstate differences. Revenue from octroi or other trade taxes should be clearly marked separately since these are subject to cancellation by the centre or states without any clear compensation.10 ULBs’ ability to earn income from public land through property leasing or partnerships in development could also be considered under this category, as could its ability to leverage land values through betterment fees, impact fees, area-linked development charges, or sale of development rights. Phatak (2009), however, cautions against extensive reliance on land- or development right-based finance until some of the 9 Municipal Acts typically prescribe the frequency with which cities can update valuations of areas or building types, only state governments can change the criteria for assessment. 10 This would significantly affect cities like Mumbai, where octroi are a major and growing contributor to revenues. 8 2012. “Marketworthiness and Municipal Finance Reforms in India,” forthcoming, Isher Ahluwalia, P. Mohanty, and Ravi Kanbur, eds. Urban Infrastructure. Oxford University Press. policy and regulation-related distortions in urban land markets are removed.11 Some of the obstacles to defining and levying these charges are also beyond ULB control. Revenue predictability: More > Less Cities’ revenue volatility stems from three (likely correlated) sources: volatility of own revenues, volatility of the tax shares transferred from the state due to variance in the underlying tax base as well as changes in the tax sharing agreement, and volatility of grants from the state and centre. The federal context affects cities’ revenue dynamics, since transfers from center and state account for a nearly half of urban local bodies’ revenues. (Figure 1, at end of the paper.) Most of these factors are already captured in the revenue indicators mentioned above. The property tax indicators mentioned above give some indication of the extent to which cities’ own tax income will change from year to year. It is more difficult to identify institutional features associated with lower volatility in state transfers to cities. One criterion would be whether states have constituted State Finance Commissions that produce reports and recommendations based on clear evidence and transparent analysis on a regular basis. However, the SFC recommendations to states are not mandatory and the political convention of accepting them has not evolved. Percapita own revenue is the most feasible summary indicator of a city’s vulnerability to volatility in transfers from higher levels of government.12 2.1.2 Liquidity/ Lack of Revenue Restrictions Cities’ marketworthiness increases with their ability to manage revenues to deploy to projects, services, or to repay investors. Cities have varying reasons for building up debt and are likely to have diverse strategies for reducing it, so this section of the MW framework sets outcome goals as well as institutional arrangements affecting revenue restrictions: debt Phatak, V. (2009). “Charges on Land and Development Rights as a Financing Resource for Urban Development,” India Infrastructure Report 2009. Oxford University Press. 12 The percent of own revenues is a more common indicator of fiscal autonomy, but this is misleading because a higher percentage could imply a stingy state as well as a more robust city. 11 9 2012. “Marketworthiness and Municipal Finance Reforms in India,” forthcoming, Isher Ahluwalia, P. Mohanty, and Ravi Kanbur, eds. Urban Infrastructure. Oxford University Press. service, expenditure obligations imposed by Municipal Acts, and revenue-raising restrictions. Interest and Finance Expenses as percent of total revenue and the debt service coverage ratio are two indicators of financial flexibility, as is the size of pension, gratuity, and provident fund obligations for city employees as a percentage of revenue. Asymmetric decentralization - devolution of service responsibilities before revenues - has also left cities with other “unfunded mandates.” 13 ULBs’ obligations vary across states in accordance with the state Municipalities Acts. ULBs are typically responsible for public markets, solid waste management, birth and death registration and licensing for some professions, operations and maintenance for roads, parking lots, parks, etc and other classic city functions, but some states mandate more expensive “Mandatory Functions.” Kerala’s ULBs, for example, are responsible for maintaining waterways and canals under their control. Karnataka’s ULBs are not only responsible for managing and maintaining municipal water works, but also constructing or acquiring new works necessary for a sufficient supply of water for public and private purposes.” Bihar’s Municipal Act allows ULBs to delay or avoid some of its legal responsibilities “having regard to its managerial, technical, financial and organizational capacity, and the actual conditions obtaining in the municipal area,” but then the next clause empowers the state government to direct the Municipality to perform any of the responsibilities if they are postponed.14 Other states’ Municipalities Act envisages services such as public transport and hospitals as obligatory, both of which may negatively impact the credit profile of the ULB since these are often run with commercially unviable user charges. States’ capital investment in urban areas also affects ULB financial flexibility since ULBs are typically responsible for operations and maintenance of assets. 2.1.3 Quality of Administration Cities’ ability to collect taxes in a timely manner is essential for marketworthiness. City ratings report universally commented on cities’ collection and coverage ratios. It is impossible to specify a single institution that would lead to greater tax collection ability in all Rao, Govinda and Richard Bird (2010). “Urban Governance and Finance in India,” NIPFP Working Paper 2010-68 use the term “unfunded mandate” to describe many city responsibilities. 14 Government of Bihar (2007). Municipalities Act. Paragraph 45(1)-45(3). Available at http://apps.biharurban.in/ActFile/BiharMunicipalActEnglish-2007(1).pdf, accessed March 16, 2012. 13 10 2012. “Marketworthiness and Municipal Finance Reforms in India,” forthcoming, Isher Ahluwalia, P. Mohanty, and Ravi Kanbur, eds. Urban Infrastructure. Oxford University Press. settings, however, so the city targets are a set of achievements as well as procedures: improving collection and coverage ratios and reducing total outstanding arrears. The percent of property tax income spent on collection may not be as readily available, but it offers a way to measure administrative efficiency. Cost-saving measures such as computerization of demand and collection notices or self-assessment (with some auditing and punishment for non-compliance to ensure quality) could also be reasonable steps that would improve administrative efficiency. Market worthiness in revenue collection also depends on having a strong informational infrastructure, including a full GIS database of properties that has been updated in the past two years, computerization of demand and collection notices, and mandatory reporting of the transactions used to assess property values. Property transactions are, in principle, already all on record with the state as part of the administration of Stamp Duty, but values are under-reported due to widespread tax evasion. The coverage ratio, for example, is based on the estimated number of properties so might be overestimated if a city had poor information on the total number of properties. Property Tax System: Frequent Updates > Long Lags Property taxes will only increase with urban improvements and provide a source of recoverable returns on investment if there is a systematic method for updating both the characteristics of properties and neighborhoods as well as the basis upon which value is assessed. 15 The elasticity of property taxes to economic growth depends, in turn, on the means of updating values and the frequency of updates to the valuation of properties (assuming valuation parameters remain constant). Self-assessment with auditing or marketbased updates of valuation in cities with deeper property markets are have more potential than city or state orders for updating to capture increases in property values.16 2.2 Information Infrastructure 15 More frequent updating could potentially create volatility as well as buoyancy. However, systems that explicitly link property tax collections 16 Self-assessment is only as good as the city’s auditing capacity or ability to deter cheating. Market-based updates depend on the depth of the market – whether there are enough transactions to provide frequent updates – as well as on the city’s ability to track these transactions. 11 2012. “Marketworthiness and Municipal Finance Reforms in India,” forthcoming, Isher Ahluwalia, P. Mohanty, and Ravi Kanbur, eds. Urban Infrastructure. Oxford University Press. High quality urban financial management systems lower the transactions cost of market finance in two ways. First, they make it easier to decipher the revenue dynamics behind the overall balance by making the sources of revenue and expenditure commitments more transparent. It is observed very often that the fiscal surplus of ULBs may be attributed to the internal dynamics of local bodies to cut back expenditures in their functional areas. Therefore, a surplus or deficit in the current or capital account as a basis for cross sectional or temporal comparisons of ULBs becomes problematic. Second, they lower the transactions costs of project-specific ratings. Marketworthy cities will have institutions and processes in place to generate a continuous flow of information at a granular level and make this transparent to market players either evaluating new bond issues or valuing paper that they already hold. The International Institute of Finance, for example, considers improvements in data standards to be one of the key requirements for increasing the level and reducing the volatility of capital flows to emerging markets. International funding for initiatives to improve transparency of accounts and adherence to international standards for data collection, as well as encourage countries to make more high-frequency data available with a shorter time lag has increased. The MW reform goals focus on institutional steps to ensure comparability, availability, and quality of city financial information. 2.2.1 Comparability Comparability is a key part of market worthiness – investors must be able to quickly assess a city’s position and compare it to others in order to make informed decisions. The comparisons across ULBs also facilitate (hopefully productive) competition. Cities could improve comparability by recording key financial data in English/Hindi as well as the local language, adhering to common accounting guidelines by aligning fund codes with those prescribed by the state and in the National Municipal Accounts Manual,17 for example. 2.2.2 Availability 17 These fund codes are not necessarily the best or the right codes, but they are a de facto standard that exists that cities are already encouraged to meet. 12 2012. “Marketworthiness and Municipal Finance Reforms in India,” forthcoming, Isher Ahluwalia, P. Mohanty, and Ravi Kanbur, eds. Urban Infrastructure. Oxford University Press. Information could be made more available by requiring cities to be more timely and frequent in disseminating four financial reports: balance sheet, income and expenditure statement, cash flow statement, and key financial ratios as well as availability of a comprehensive asset register. The income and expenditure as well as cash flow statements should be reported quarterly or half-yearly in order to increase transparency of ULB operations, while balance sheets and financial ratios be reported annually to indicate financial sustainability of the ULB. Income and expenditure statements provide insights into the ongoing investment activities, efficacy of tax collection and compliance, efficacy of collection of user charges, composition of expenditure, and timeliness of state or central transfers to the ULB – all of which are of interest to the market in order to understand administrative efficacy and revenue risk. Cash flow statements also provide insights in the quality of ULB financial administration well as the impact of state and national decisions on ULB finances – ULBs’ ability to maintain adequate liquidity depends on both managerial prowess and state/national predictability in devolution. Cities could also increase availability of information by implementing accounting systems to track O&M costs for each of the major service categories – water supply and sanitation, solid waste management, public transport services - and make these available. This is one of the ULB reforms required under JNNURM. 2.2.3 Quality Cities can increase quality of information by implementing and strengthening control systems for financial information. Most cities are audited by state-level Local Fund Audit departments, so one step would be to ensure that these offices are fully staffed with trained accountants and have the legal powers to request detailed information from cities. This would be a state-level reform. Cities that have automated financial management systems, in particular those that have created a “zero paper” environment in which revenues, expenditures, and commitments are logged directly into the financial accounting system rather than recorded 13 2012. “Marketworthiness and Municipal Finance Reforms in India,” forthcoming, Isher Ahluwalia, P. Mohanty, and Ravi Kanbur, eds. Urban Infrastructure. Oxford University Press. by hand and transcribed, are also considered more market worthy. The direct recording of transactions and automation of systems limits room for fudging or errors. 2.3 Implementation & Maintenance Capacity Cities will not be able to access and utilize market funds consistently without developing their ability to formulate and implement projects. Return on investment is a function of managerial and implementation capacity at the ULB level. The MW framework includes outcomes such as provision of high-quality infrastructure and services, on time, within budget, and at reasonable cost, as well as institutional targets to ensure that this degree of efficacy is sustainable rather than the result of a one-time push or a limited run of good luck. 2.3.1. Institutions Cities can improve institutional quality through staff changes, revising institutions, and improving information flow. Increasing the number of engineers and planners on staff is one target. Regularity of elections and the average tenure of the Commissioner or top bureaucrat create a more stable working environment. Both of these are mentioned in the literature as important considerations for credit ratings reports, though neither seems to be the focus of city ratings reports. Having institutions such as the District or Metro Planning Committees that are specifically tasked with planning for the ULB and its surrounding areas is also important. The institutional underpinning for improved information flow includes well-defined functionary and field codes and creation of an MIS to deliver various progress reports on an ongoing basis. Several of the MIS reports listed in the National Accounts Manual are important elements of information flow for effective decision-making. Name of Report Performance Statement MIS Frequency Preparation Monthly of Usefulness Compares the income and expenditure of ULB on monthly, quarterly and yearly basis with the corresponding previous year’s 14 2012. “Marketworthiness and Municipal Finance Reforms in India,” forthcoming, Isher Ahluwalia, P. Mohanty, and Ravi Kanbur, eds. Urban Infrastructure. Oxford University Press. figures. This will enable the ULB to analyse the performance of the current year by comparing it with the corresponding month of the previous year, the previous month (s) of the current year. This comparison can also be made against the budget. Function wise Quarterly This statement provides function wise Budget Utilisation information about actual revenue Report-Revenue expenditure incurred against budget. This Expenditure would help in analyzing the actuals vis a vis the budget for each function. This can be at the overall ULB level or drilled down to ward or zonal level depending upon the extent of data being captured in the system. Function wise Quarterly This statement provides function wise Budget Utilisation information about capital expenditure ReportCapital incurred against budget. This would help in Expenditure analyzing the actuals vis a vis the budget for each function. This can be at the overall ULB level or drilled down to ward or zonal level depending upon the extent of data being captured in the system. Source: National Municipal Accounting Training Manual for Elected Representatives and Top Management, Ministry of Urban Development, GoI, November 2007. Cities can also improve the information process by implementing an official public grievance process in which complaints are provided to departments for incorporation into their work plans. 2.3.2 Outcomes Administrative efficiency The steps toward administrative efficiency will vary across ULBs, but three financial ratios: administrative expenses to total income, the ratio of establishment expenses to total income, and operations and maintenance to gross fixed assets, can be used to gauge the success of whatever steps cities do take. In the absence of a clear target for these indicators – lower is generally better, but not too low – one way to set targets would be to benchmark cities’ performance against other ULBs of a similar size for the first two and all ULBs for the second. The assumption is that city size affects that scale of the service, which in turn affects 15 2012. “Marketworthiness and Municipal Finance Reforms in India,” forthcoming, Isher Ahluwalia, P. Mohanty, and Ravi Kanbur, eds. Urban Infrastructure. Oxford University Press. the appropriate human capital/capital ratio on providing services.18 The ratio of O&M to gross fixed assets is less likely to be scale-dependent. Outliers on both sides are problematic: too low means that assets may not be properly kept up, too high means that they may be ineffectively kept up and constantly breaking down. Administrative efficiency could also be measured by looking at unit costs of some common infrastructure or services provided, such as cost per Establishment expenses: Salary, wages, pensions, etc. streetlight, or cost per kilometer of road. Unit costs should be used cautiously as a reform benchmark, and only for activities that that are relatively easy to audit; otherwise cities might have Administrative Expenses: Rent, rates, office maintenance, etc. Operations & Maintenance: Power & fuel, consumption of stores, repairs and maintenance, etc. an incentive to misrepresent activity or assignment of staff time in order to meet targets. Market worthiness does not include operations and maintenance to total income as a target. This is in order to avoid creating any disincentive to maintain existing infrastructure and services rather than create new ones. Political compulsions and the structure of devolutions to cities tend to motivate capital investment where maintenance may be a more effective use of funds. Project Management Project management targets could rely on indicators often reported by the Ministry of Statistics and Programme Implementation to indicate the quality of central government project management: average and frequency of cost overrun for investment projects, and average and frequency of time overruns. The utilization rate of funds from centrally sponsored schemes could be another indicator of project management ability, although these data would have to be adjusted to account for issues such as inability to raise cofunding, state delays, or other factors beyond project management. Placing too much weight on utilization rates, however, could have perverse incentives unless other monitoring prevents cities from squandering the funds. 18 Geographic dispersion may also affect the model for service provision; we may consider this if there are many cities of similar size but varying population density. 16 2012. “Marketworthiness and Municipal Finance Reforms in India,” forthcoming, Isher Ahluwalia, P. Mohanty, and Ravi Kanbur, eds. Urban Infrastructure. Oxford University Press. Infrastructure and Service Quality The third set of outcome measures, service quality, could be based on ULB on a commonly agreed-upon service standard. The 2008 Ministry of Urban Development Service Quality norms, for example, have been endorsed by the Thirteenth Finance Commission as benchmarks for assessing ULB performance for incentive grants and were used by the Ahluwalia committee as the basis for estimating investment requirements. (Table 1) There are two challenges in implementing this indicator: first, measuring city performance, and second, ensuring that the rating is actually sensitive to city effort and innovation in providing services. According to raters and rating methodology, judging performance or efficiency on the basis of output measures like service delivery levels is challenging due to inadequacy of standardized and comparable data across municipalities. Raters noted that the outcome information was often the most difficult to compare across cities as well as the most difficult to audit and evaluate. ULBs’ management information systems will have to be upgraded in order to even assess performance. Incremental city performance could be assessed separately in each of the major categories of service provision: water supply, sewerage and sanitation, solid waste management, public transport, traffic support infrastructure, and street lighting. In order to prevent a large cluster of outcomes near zero, any program to encourage cities to improve project management could calculate partial progress toward the targets. Still, service provision has the potential to be a sticky indicator of city administrative capacity, however, under-rewarding cities that have seen a recent improvement in administrative capacity and over-rewarding those whose capacity is declining or whose infrastructure is particularly good for reasons beyond ULB efficacy. It is also likely to be correlated with city wealth. One adjustment might be to report improvement in service levels per year. The Thirteenth Finance Commission’s approach of asking states to work with local bodies to declare service standards that they can commit to meeting is another option. Success in fees and user charges are a second way to measure quality of outcomes, since these are the market test of quality of services. The ULBs’ ability to recover cost can only be realized if there is a simultaneous effort towards improving the quality of service delivery which best fits the assessed requirements of ground realities, efficiency in 17 2012. “Marketworthiness and Municipal Finance Reforms in India,” forthcoming, Isher Ahluwalia, P. Mohanty, and Ravi Kanbur, eds. Urban Infrastructure. Oxford University Press. operations and management, and regular monitoring and systemic check-ups. The measure is flawed, however, because ULBs may choose to finance services through broad-based service tax levies on top of property taxes, or by adjusting the area-specific property tax rates rather than adopting a more targeted user fee model, even if they can. This may also reflect their assessment of the most sustainable, administratively efficient way to collect revenues given their city’s infrastructure. One proxy could be measuring collection efficiency of user charges for water. This is one of the services for which tariffs are the economically sensible approach and desirable to encourage conservation. The assumption is that collection efficiency is higher when citizens are more willing to pay for the service. 3. Implementing Marketworthiness The marketworthiness agenda is a subset of the reforms outlined in the Report of the Second Administrative Reforms Commission (2005), the Jawarhalal Nehru National Urban Renewal Mission (JNNURM) as well as more recent reports such as the Thirteenth Finance Commission and the agenda laid out in the Ahluwalia Committee report. The depth of intention to enable and motivate cities to be marketworthy (as well as better planned, more inclusively governed, and more effectively serviced) is thus clearly stated; the challenge is how to actually ensure that the reforms, particularly those that require state government changes, happen. Implementing market worthiness will be politically and operationally challenging. The Political Challenge State policies within their constitutionally recognized domain of responsibility for “local body governance” are the main political challenges. The 74th amendment calls for devolution, but even if fully implemented and enforced, states retain control over revenues. While efforts such as the JNNURM’s mandatory state reforms and the Thirteenth Finance Commission’s proposed performance grants create financial incentives for states to undertake changes that would improve the Revenue Dynamics component of 18 2012. “Marketworthiness and Municipal Finance Reforms in India,” forthcoming, Isher Ahluwalia, P. Mohanty, and Ravi Kanbur, eds. Urban Infrastructure. Oxford University Press. marketworthiness, the constitutional amendments on revenue powers recommended in the Ahluwalia Committee may be the only real way to achieve real progress. Individual city rating reports for JNNURM clearly note the extent to which state laws affect city creditworthiness in their ratings methodology, and the general notes on ratings methodology emphasis states’ dominance in their positioning of state creditworthiness as a kind of “sovereign ceiling” on urban local bodies. ICRA (2005), for example, notes that “[Attention to state creditworthiness] follows the fact that all ULBs are constituted under a State legislation that determines the legal framework within which the ULBs would function. The legislation (usually called as a “Municipality Act”) would define, among other things, a ULB’s constitution, its range of obligatory and discretionary functions, its revenue raising powers, and the nature and extent of support it would receive from the State government. Also, this legislation can be altered only by the State legislature. In addition, according to the Constitution, the States are obliged to devolve a portion of the net proceeds of their taxes, duties, tolls and fees to the ULBs, on the basis of the recommendations of the State Finance Commissions (SFCs). While such devolutions form an important component of the total receipts of ULB, ICRA also notes the fact that the SFCs’ prescriptions on the extent of transfer are recommendatory, and ultimately the extent of transfer is decided by the Legislature (which effectively means the State government). Thus, ULBs are reliant to a large extent on the State government for both their financial and operational autonomy. Although States cannot directly appropriate any surplus generated by a ULB, they can limit the ULB’s autonomy by setting terms for inter-governmental transfer, revenue and expenditure responsibility; allocating/ redistributing tax authority; and mandating spending. Also, a ULB’s credit quality depends on the larger macroeconomic environment prevailing in the State, which in turn is influenced by the policies of the State government. As a result of these factors, in ICRA’s opinion, the credit quality of a ULB is closely linked to that of the State.” (ICRA, 2005) 19 2012. “Marketworthiness and Municipal Finance Reforms in India,” forthcoming, Isher Ahluwalia, P. Mohanty, and Ravi Kanbur, eds. Urban Infrastructure. Oxford University Press. Fitch (2008) writes: The institutional framework, whether centralised or decentralised, influences the subnational’s operating revenue structure. In order to assess it, Fitch looks at the following: The amount of the transfers and their relative size in the subnational’s operating revenue; Whether transfers are earmarked for specific purposes or can be used to fund operations and debt service; Revenue sources legally delegated to the subnationals; The flexibility of the subnational to adjust its tax revenue budget to a changing economic environment; and the legal and political risks associated with any national revenue‐sharing system and the direction of any changes in the system (toward more or less decentralisation). With respect to the legal and political risks, Fitch recognises that federal structures are dynamic over the long term, but that the shifts may influence fiscal balances in the short term. The institutional framework influences the operating expenditure structure of the subnational and Fitch considers the following factors: The size and type of mandated expenditure (eg public health, public education, or public transport); Whether operating expenditure may be funded by user charges, fees and taxes delegated to the unit, or earmarked revenue from another unit of government; Whether the subnational can adjust its expenditure budget effectively to a changing economic environment; and Socio‐economic trends underpinning the demand for public services (eg if population growth is straining the supply of public services).” 20 2012. “Marketworthiness and Municipal Finance Reforms in India,” forthcoming, Isher Ahluwalia, P. Mohanty, and Ravi Kanbur, eds. Urban Infrastructure. Oxford University Press. JNNURM’s mandatory reforms for states, even if fully implemented, would not substantially improve marketworthiness. The rationalization of stamp duty and reforms in rent control JNNURM Mandatory State-Level Reforms 74th CAA (Transfer of 12th Schedule functions, Constitution of a DPC and MPC) Transfer of City Planning Functions Transfer of Water Supply & Sanitation Reform in Rent Control Stamp duty rationalization to 5% Repeal of the Urban Land (Ceiling and Regulation) Act Enactment of Community Participation Law Enactment of Public Disclosure Law and the ULCRA could improve property tax revenues and administration, but this is one component of the revenue dynamics agenda. The transfer of responsibility for water and sanitation could worsen ULBs’ credit profiles without complementary reforms that increase revenues and ensure more predictable flows. Creation of Metropolitan and District Planning Committees (MPCs and DPCs) could improve expenditure and infrastructure delivery, but only if these are well-funded, fully-staffed, and have clear and clearly enforced jurisdictions relative to other state and local authorities. The mandatory reforms do not address states’ effective control over ULB revenues and their dynamics, nor do they require states to invest in urban information systems or capacity-building and capacity transfer. It is also striking that a program launched in 2005, more than a decade after the constitutional amendment, would have to make implementation of that amendment a conditionality for investment. The Thirteenth Finance Commission’s proposal for performance-linked grants does include some measures that would improve revenue dynamics if states respond to the pressure, but it is unclear whether the performance grants offer sufficient leverage. The performance-linked portion of the grant to states on behalf of local bodies requires states to, among other things set up an electronic system for automatic transfers of grants from the commission to local bodies within five days of receipt from the Central Government, lay out clear criteria for membership in the State Finance Commissions in an act of legislation, “fully enable” local bodies to levy property taxes and remove “all hindrances” to their doing so, set up a Property Tax board to look into property enumeration and valuation, and declare service performance targets. The electronic system and professionalization of SFCs will help increase revenue predictability, while the devolution of authority over property 21 2012. “Marketworthiness and Municipal Finance Reforms in India,” forthcoming, Isher Ahluwalia, P. Mohanty, and Ravi Kanbur, eds. Urban Infrastructure. Oxford University Press. taxes could be used to improve administration. Ideally the proposed Property Tax Board would design the taxes to be more responsive to changes in property value, although it is not clear why a state board would be interested in this if revenues remained with ULBs. The Ahluwalia Committee’s recommendation to introduce a local bodies finance list in the constitution and empower ULBs with exclusive taxes as well as amend the constitution to require states to share a pre-specified percentage of their revenues from all taxes on goods and services is the strongest statement yet, but it is unclear how this will fare politically. Marketworthy ULBs with substantial revenue autonomy would be potential political challengers, and states’ history of dealing with potentially powerful local entities is not encouraging.19 Operational Challenges: Information Infrastructure and Expenditure and Implementation Capacity Building the information infrastructure and expenditure and implementation capacity are operational challenges. Change in these dimensions of marketworthiness is already underway: according to the Ministry of Urban Development (cited in the Thirteenth Finance JNNURM Mandatory ULB Reforms Commission Report) local bodies’ expenditure has increased in the recent past due in part to additional investments in accounting systems, computerisation of operations, tax administration, and project monitoring. The Finance Commission’s record of its conversations with local bodies also notes their demands for more investment in information systems for tax administration and service delivery. These dimensions of marketworthiness could improve further with expansion of the 19 Adoption of accrual based dualentry accounting Introduction of e-governance using GIS, MIS for various urban services Reform of property tax with GIS and increase in collection efficiency to 85% Levy of reasonable user charges so that full cost of O&M is collected over 7 years Internal earmarking of budgets for provision of basic services to the urban poor. Provision of basic services to the urban poor including security of tenure at affordable prices. Chapters 6 and 7 of K.C. Sivaramakrishnan (2011). Revisioning Indian Cities: The Urban Renewal Mission. New Delhi: Sage discuss some of the politics of preceding the 74 th Amendment. 22 2012. “Marketworthiness and Municipal Finance Reforms in India,” forthcoming, Isher Ahluwalia, P. Mohanty, and Ravi Kanbur, eds. Urban Infrastructure. Oxford University Press. JNNURM mandatory reforms for ULBs and implementation of the Finance Commission’s recommended performance grants. The JNNURM mandatory reforms for ULBs already include upgrading accounting practices, implementing e-governance and MIS for urban services, GIS systems for property tax collections, and other arrangements to increase collection efficiency.20 The Thirteenth Finance Commission’s proposed performance-linked grants specifically include some of the elements of the marketworthiness agenda, including: implementing an accounting framework for all ULBs consistent with the accounting format and codification pattern suggested in the National Municipal Accounts Manual, putting in place an audit system for all local bodies, and declaring service performance targets. The audit system will presumably help make more of the financial ratios and other information mentioned in the marketworthiness indicators available to the general public. Still, the state of subnational finances as recorded by the Thirteenth Finance Commission is a sobering reminder of the challenges ahead. According to them, “There are significant discontinuities in data relating to revenue and expenditure of local bodies submitted by State Governments to FC-XI, FC-XII, and to this Commission. These discrepancies detract from the credibility of the data. Unfortunately, successive Finance Commissions, including our own, have been unable to independently verify the data provided on local bodies. The need to put in place a system where financial and performance data of local bodies can be audited and confirmed credibly cannot be overemphasised. Ten years have elapsed since FC-XI underlined the need for maintaining a database as well as up-to date accounts and made a provision for supporting State Governments in addressing these shortcomings. Five years have elapsed since FC-XII highlighted similar inadequacies and made similar recommendations. Much has been said by the earlier Finance Commissions on this important subject. Despite this, little improvement has been noted in the situation. While we recognise, appreciate and support the recommendations of the previous Commissions on the issue of data bases, accounts, and audit, clearly an alternative approach may need to be adopted to address these issues beyond funding support for these initiatives.” (Report of the Thirteenth Finance Commission, Para 10.93, 10.94) 20 The JNNURM mandatory reforms do not require any specific performance on revenue collections, however, a point noted by the Thirteenth Finance Commission’s in its suggestion to introduce conditionality in JNNURM to close the gap between market and assessed values of properties. 23 2012. “Marketworthiness and Municipal Finance Reforms in India,” forthcoming, Isher Ahluwalia, P. Mohanty, and Ravi Kanbur, eds. Urban Infrastructure. Oxford University Press. The Ahluwalia Committee’s emphasis on capacity-building in addition to incentives could be such an approach. The report calls for Reform and Performance Management Cells including a dedicated Municipal Information Unit to “collect, collate, and analyse comparable data on municipal services and finances on an annual basis” (xxxi) to be set up for the GoI, state, and large cities. The report calls for building up the domestic training capacity, as well as creating pathways for professionals to come into service through a municipal cadre within the IAS that has competitive recruitment and selection. Combining and recommendations from these reports and programs into a single, widely applied, incentive and capacity-building effort by the Union government could accelerate marketworthiness in several ways: First, it would separate marketworthiness from other urban reform goals and enable incentives to be more clearly targeted and enforced. It could be more politically palatable to withhold performance grants for implementing accounting systems and GIS for property taxes than to stop investments that also go into anti-poverty projects and infrastructure. Second, such a program could potentially expand the coverage of the program from JNNURM cities and go beyond the Finance Commission’s grant to states to offer investment incentives for cities as well. Third, a coordinated program could also ensure that the investments in information infrastructure are somewhat standardized so that comparable information on city finances, performance, and structure were more available. 5. Conclusion This paper has outlined an analytically coherent list of urban reform targets for achieving market worthy cities, or cities capable of consistently and sustainably accessing private finance to develop their infrastructure and services. Market worthiness focuses on the institutions and processes that produce the financial outcomes that are the basis for sustained and sustainable creditworthiness. The reform standard combines elements of existing creditworthiness and service delivery agendas to outline a set of targets to improve cities’ readiness to sustainably, effectively, access private finance for urban infrastructure and services. The list of reform targets can also be used as a benchmark to assess current 24 2012. “Marketworthiness and Municipal Finance Reforms in India,” forthcoming, Isher Ahluwalia, P. Mohanty, and Ravi Kanbur, eds. Urban Infrastructure. Oxford University Press. gaps in city and state institutions, practices, and administrative performance that affect cities’ ability to access private finance. ULBs’ ability to access finance is clearly just one factor in development of India’s municipal finance markets, but it is an important one. Cities clearly have to have the motivation to do so – to choose to go to markets for finance on specific terms rather than to other levels of government for loans or transfers. Investors may also need nudges to lend the public sector as well, at least at first while risks are still being discovered. However, in the long run cities’ ability to manage their finances and undertake investments transparently enough to attract investment is a necessary foundation for sustainable municipal finance markets. 25 Jessica Seddon Market Worthiness Draft: March 18, 2011 APPENDIX 1 Market Worthiness Targets Category Concept Details Type of Criteria Better Rationale State or ULB Action Required? REVENUE Coverage Ratio number of properties paying taxes/estimated number of properties Collection Ability Higher measures tax administration ability ULB, though requires investment in urban MIS. REVENUE Collection Ratio amount collected/amount billed Collection Ability Higher measures tax administration ability REVENUE Outstanding Property Tax Gross Property tax receivables ratio: ((Opening PT receivable + closing PT receivable)/2) * 365)/demand for property tax raised during the year. Collection Ability Lower measures tax administration ability ULB, though requires investment in urban MIS. ULB, though requires investment in urban MIS. REVENUE GIS database YES/NO of properties, updated within last 2 year. Collection Ability Yes input for tax administration, also check on validity of coverage ratio 1 ULB, though requires investment in urban MIS. Jessica Seddon Market Worthiness Draft: March 18, 2011 APPENDIX 1 Market Worthiness Targets Category Concept Details Type of Criteria Better Rationale REVENUE Administrative Efficiency % of property tax income spent on collections Collection Ability Lower outcome measure of efficiency of tax administration REVENUE Computerizati on of demand and collection YES/NO Collection Ability Yes proxy for cost of tax administration REVENUE Self assessment, with auditing and punishment YES/NO Collection Ability Yes proxy for cost of tax administration, require audits in order to assure reasonable quality. REVENUE Mandated reporting of transactions used to assess market value YES/NO Collection Ability Yes input for understanding coverage ratio 2 State or ULB Action Required? ULB, though requires investment in urban MIS. ULB, though requires investment in urban MIS. ULB Already mandatory for Stamp Duty, needs to be enforced. State action to reduce Stamp Duty may improve quality of data reported. Jessica Seddon Market Worthiness Draft: March 18, 2011 APPENDIX 1 Market Worthiness Targets Category Concept Details Type of Criteria Better Rationale REVENUE Properties updated in the last 3 years? YES/NO Collection Ability Yes Essential for ensuring link between property taxes and city development. Municipal acts allow updates in valuation every 3-4 years, most ULBs do not actually update. REVENUE Area rates updated in the last 3 years? YES/NO Collection Ability Yes Enables cities to adjust to capture area improvements based on public investment ULB, though requires investment in urban MIS. REVENUE Expenditure committed to debt service Expenditure mandates embedded in Municipal Acts loan service as % of revenue Liquidity Lower Reflects restrictions on revenue. ULB/State comparative list Liquidity Reflects restrictions on revenue. State REVENUE 3 State or ULB Action Required? Jessica Seddon Market Worthiness Draft: March 18, 2011 APPENDIX 1 Market Worthiness Targets Category Concept REVENUE Revenue comparative list restrictions embedded in Municipal Acts Debt Service Amount of cash flow Coverage Ratio available to meet annual interest and principal repayments on debt as a ratio of net operating income over total debt service payments. Liquidity Liquidity >1 essential, though too high suggests inefficient use of cash REVENUE Earmarked Funds Pension, gratuity, provident fund as a % of revenue Liquidity Lower Reflects structural liabilities, higher may indicate unsustainable employee mix State/Central REVENUE Property Tax Methodology ARV/Capital Value/ Unit Area Revenue Levels & Growth Unit Area or Capital Value Reporting on process State REVENUE Details Type of Criteria 4 Better Rationale Reflects restrictions on revenue. State or ULB Action Required? State ULB/State Jessica Seddon Market Worthiness Draft: March 18, 2011 APPENDIX 1 Market Worthiness Targets Category Concept Details Type of Criteria Better Rationale REVENUE Independence of revenue base per capita own revenues Revenue Levels & Growth Higher Measure of insulation from political risk at higher levels of government REVENUE Per capita non property tax own revenue Non propertybased options for revenue Comparative list of other revenue sources with revenue potential. Revenue Levels & Growth More Comparative list provides a benchmark for ULB taxation powers State/Central Regularity of reporting Annual balance sheets and financial ratios Availability Yes Essential for an ongoing picture of municipal finances & financial management ULB, though requires investment in MIS REVENUE INFORMATION Revenue Levels & Growth 5 State or ULB Action Required? State State/Central Jessica Seddon Market Worthiness Draft: March 18, 2011 APPENDIX 1 Market Worthiness Targets Category Concept Details Type of Criteria Better Rationale INFORMATION Regularity of reporting Quarterly income and expenditure statements, cash flow statements available online within 2 weeks of then end of the quarter. Availability Yes Essential for an ongoing picture of municipal finances & financial management INFORMATION Establishment of service-level accounting to track O&M for services YES/NO for water & sewerage, SWM, public transport Availability Yes Enables investors to understand cost structure and sustainability of various city activities that funds may be directed to. ULB, though requires investment in MIS INFORMATION Asset register YES/NO Availability Yes Enables investors to understand financial position of city ULB, though requires investment in MIS INFORMATION Recording of key financial data in English/Hindi English/Hindi records of specific financial indicators Comparability Yes Reduces costs of rating/understanding ULB, though requires investment in MIS 6 State or ULB Action Required? ULB, though requires investment in MIS Jessica Seddon Market Worthiness Draft: March 18, 2011 APPENDIX 1 Market Worthiness Targets Category Concept Details Type of Criteria Better Rationale INFORMATION Adherence to common accounting guidelines % Adherence to fund codes prescribed by the state Comparability Yes Standardization of financial information lowers ratings costs and eases comparisons INFORMATION Adherence to common accounting guidelines % Adherence to 2 digit function codes prescribed in NMAM. Comparability Yes Standardization of financial information lowers ratings costs and eases comparisons ULB, though requires investment in MIS INFORMATION Modern accounting system Adherence to double entry accrual accounting Comparability Yes Improved information for decision-making, comparable accounting format across cities. ULB, though requires investment in MIS INFORMATION Adherence to common accounting guidelines % Adherence to 4 digit function, subfunction, subsubfunction codes prescribed by the state Comparability Yes 7 State or ULB Action Required? ULB, though requires investment in MIS ULB, though requires investment in MIS Jessica Seddon Market Worthiness Draft: March 18, 2011 APPENDIX 1 Market Worthiness Targets Category Concept Details Type of Criteria Better INFORMATION Strong independent audit, compliance, risk management department. Automation of financial accounting Staffing profile and legal powers of of state Local Fund Audit department. Quality Paperless recording of all transactions above Rs.1000 Quality, Availability Staffed with trained accountants, empowered to obtain information from cities. Yes Zero paper environment revenues and expenditures recorded directly by system rather than from ledger to system Does city have an egov solution and standard operating procedures that require revenues and expenditures to be directly entered? Quality, Availability INFORMATION INFORMATION 8 Yes Rationale State or ULB Action Required? State Less room for fudging indicators, faster processing time ULB, though requires investment in MIS. Less room for fudging indicators, faster processing time ULB, though requires investment in MIS Jessica Seddon Market Worthiness Draft: March 18, 2011 APPENDIX 1 Market Worthiness Targets Category Concept Details Type of Criteria Better Rationale EXPENDITURE Stability of top leadership Avg tenure of Commissioner/equivalent Institution Longer Stable but not stagnant leadership mean projects are more likely to continue uninterrupted, plans not change as frequently. EXPENDITURE Financial accounting to support decisionmaking MIS to support decisionmaking Well defined functionary and field codes in use Institution Yes % of compliance with type and frequency of MIS reports listed in NMA Training Manual Institution Higher This is a way of benchmarking functional performance of the MIS, not just leaving it to whether there is an MIS or not. ULB though requires investment in MIS Constitution of District and/or Metro Planning Committees YES/NO Institution Yes This is an indication of ability and infrastructure for regional planning, essential to city growth State EXPENDITURE EXPENDITURE 9 State or ULB Action Required? State ULB though requires investment in MIS Jessica Seddon Market Worthiness Draft: March 18, 2011 APPENDIX 1 Market Worthiness Targets Category Concept Details Type of Criteria Better EXPENDITURE Regularity of elections Institution Yes EXPENDITURE Human resources Human resources Real-time information on project/service issues State has supported and city has held at least two elections. # engineers per capita State or ULB Action Required? State Institution Higher ULB in principle # planners per capita Institution Higher ULB in principle existance of public grievance system with routing to departments and consideration in work plan Time overruns Institution Yes Grievances are a low-cost source of micro-level planning information. ULB, though requires investment in MIS Outcome Higher Reflects project management ability ULB Cost overrun for investment projects (avg? frequency?) based on service quality achievements Outcome Higher Reflects project management ability ULB Outcome Higher Reflects historical ability to execute projects. ULB EXPENDITURE EXPENDITURE EXPENDITURE EXPENDITURE EXPENDITURE Project Implementatio n Project Implementatio n Ability to provide quality services 10 Rationale Jessica Seddon Market Worthiness Draft: March 18, 2011 APPENDIX 1 Market Worthiness Targets Category Concept Details Type of Criteria Better Rationale EXPENDITURE Administrative Efficiency Establishment Expenses/Total Income as % of average for cities of similar sizes Outcome <1 Reflects efficient use of HR EXPENDITURE Administrative Efficiency Outcome <1 Reflects efficient use of HR ULB EXPENDITURE Ability to charge for services Outcome Higher The "market test" of service quality EXPENDITURE Administrative Efficiency Administrative Expenses/Total Income as % of average for cities of similar size Collection efficiency for water tariffs. (CE = 0 in case water is not chargable) O&M/Gross fixed assets as % of ULB average Outcome EXPENDITURE Project Implementatio n Utilization rate of funds from centrally and state sponsored schemes Outcome closer to the mean for cities of similar size Higher ULB/State depending on involvement of parastatals. ULB 11 State or ULB Action Required? ULB ULB Jessica Seddon Market Worthiness FIGURES 12 Draft: March 18, 2011